Quick Take: Before examining a company's top and bottom lines, the managers of AmSouth Mutual Fds Select Equity/A (ASECX) check its position within its industry.
Peter Jankovskis, who oversees the portfolio with Neil Wright and Janna Sampson, wants companies that lead or dominate their businesses, and that are safeguarded by roadblocks like strong brand names. The trio then look for reasonably priced stocks of growing companies.
The $48 million fund has displayed less volatility than the competition while delivering better returns. For the three-year period ended in March, the fund returned an average annualized 6.5%, versus a loss of 14.6% for its large-cap blend peers.
The Full Interview:
Not many companies meet the criteria needed to gain entry to the AmSouth Mutual Fds Select Equity/A (ASECX), and only a handful of those make their way into the portfolio.
Peter Jankovskis, and the other two managers who oversee the fund, start by focusing on businesses with what they call "market power," that is, leading or dominant industry positions combined with barriers to entry, like patents, for example, that protect them from rivals.
Next, the team screens for stocks that are undervalued, looking for shares sporting a price-to-earnings ratio near or slightly less than that of the Standard & Poor's 500-stock index.
"The one thing that really stands out about these companies is that they have very stable earnings growth," Jankovskis says. "They tend to crank out good results year-in and year-out, and have very steady cash flows. And in the long run, they tend to have earnings growth that is just a bit higher than the market."
The universe of stocks the managers hunt in contains only about 150 mostly large-cap stocks, of which just 18-25 wind up in the fund, says Jankovskis, director of research at OakBrook Investments LLC of Lisle, Ill., the fund's investment adviser.
As a typical holding, he cites Sysco Corp (SYY), the giant food distributor, which has been in the fund since its inception in 1998, and currently holds seventh place in the portfolio. Sysco's "size gives them a tremendous advantage against their competitors," enabling them to negotiate better deals with suppliers, and to operate warehouses more efficiently than similar smaller companies, Jankovskis says.
Strong market shares and well-known names were two of the qualities that led the fund to buy shares of Disney (Walt) Co (DIS) and Home Depot (HD) in July, Jankovskis says.
Disney's stock was depressed at the time because the weak economy and fear over terrorist attacks had hurt attendance at its theme parks, Jankovskis explains. In addition, ratings at its broadcasting outlets were down, and its film unit had failed to produce a blockbuster hit. However, he felt all those problems were only temporary, and posed no danger to the company's strength in the long run.
Home Depot's stock was also under pressure when the fund bought it. Wall Street feared then that the home improvement retailer would suffer if interest rates rose, and investors also were concerned that it was losing sales to Lowe`s Cos (LOW), according to Jankovskis.
However, Jankovskis and his colleagues reasoned that Home Depot was less sensitive to interest rates than Lowe's because it had less exposure to big-ticket home appliances. Jankovskis adds that although Home Depot's bottom line growth has slowed in recent months, he still expects it to churn out double-digit profits over the next two to three years.
The top stock in the portfolio is packaged foods producer Genl Mills (GIS), which Jankovskis likes because of its well-known brands, such as Cheerios and Pillsbury. The company is also attractive because it has been able to gain market share while raising prices, he says.
The Securities and Exchange Commission has asked General Mills for documents in connection with the regulator's investigation into Dutch grocer Ahold Ltd ADR (AHO). But Jankovskis says he does not see the probe as a problem for General Mills, because Ahold represents only a "very small piece of their business."
The fund's second-largest holding is Pitney Bowes (PBI), which makes equipment and software for mailing letters and packages. The managers were drawn to the company because it is the leading manufacturer of postal meters, and holds many patents in that area, Jankovskis says.
The fund will sell a company if its financial fundamentals erode, or if its shares become too pricey. For example, the managers unloaded Hershey Foods (HSY) in July, when food distributor's stock took off because its owners were seeking a buyer.
As a rule, though, Jankovskis said the fund's managers are patient investors, since it may take two to five years for a stock to reach what they think is its peak value.